Keep your Aussie shares for dividends, but go global for growth

Many of our favourite brands including Apple, Disney and Nike are listed in the United States. The world’s number one carmaker, Toyota, is based in Japan. Even items we identify as homegrown are owned by global companies. Milo is owned by Swiss food and drink multinational Nestle. Those Tim Tams beside your coffee are owned by the US-listed KKR.

Despite the ubiquity of international goods and services in our daily lives, Australian investors shy away from these companies and instead prefer to invest at home. The 2023 ASX Australian investor survey that just 16% of investors directly own international shares, compared to 58% for the local market.

The bifurcation is even more puzzling given the Australian market only represents 2% of the global equities' universe.  

There are a multitude of perceived dangers when investing overseas. Our goal is to dispel these concerns and explain why international shares deserve a spot in your portfolio.

Higher quality returns

Diversification is a key foundation for preserving and building long-term wealth. Spreading your eggs into several baskets reduces volatility and ensures your portfolio isn’t driven by a handful of investments.

Since 1970, a diversified portfolio of 60% international shares and 40% Australian shares outperformed a portfolio of only local stocks by 0.7% per annum. This might look like a nominal difference, but with the power of compounding adds up to a tidy sum.  

If you had made an initial $10,000 investment in the diversified portfolio it would be worth $1.80 million today, compared to $1.31 million for the local portfolio – an extra  $490,000 in your pocket.

These returns were also less volatile. International markets zig when Australia zags, mitigating against drawdown and smoothing out returns.

In isolation, Australian shares have outperformed international shares on average 50% of the time in a given year. However local shares exhibited greater volatility 70% of the time.

Intuitively, this makes sense. The Australian market is highly concentrated with just a few companies driving future returns, notably the big four banks and three iron ore miners. Indeed, the top ten companies listed on the S&P/ASX 200 account for 47% of the index. Any sizeable movements in the top companies can have a material impact on your returns.

International markets by contrast are better diversified and have greater exposure to growing sectors such as healthcare and technology.

It’s too complicated

Experienced investors in particular are hesitant to invest overseas because it has historically been a convoluted endeavour. Complicated tax forms, punitive brokerage costs and foreign ownership structures simply weren’t worth the hassle. Fortunately, access to international markets is much easier today.

Investing via an exchange-traded fund (ETF) largely removes the complexity. An ETF gives you ownership of the best companies and emerging winners within a diversified fund. Units are bought and sold on the Australian Securities Exchange, the same as if you were purchasing shares in Woolworths or Wesfarmers.

How about currency?

Currency is commonly cited as a reason for avoiding international shares. Investing overseas means you not only need to account for movements in the share price but also changes between foreign currencies and the Australian dollar.

The flip side is that over the long-term developed economies have relatively stable currencies. Assuming your holding period is measured in years rather than days, the returns from international companies will dwarf currency movements. For those who are averse to currency exposure, you can opt for a hedged investment which nullifies the impact of currency for a modest fee.

Keep franking and go global

Another common argument against investing abroad is the absence of franking credits. Domestic share investors benefit from the many mature and stable businesses that pay franked dividends.

Franking credits are undoubtedly an attractive benefit of investing locally, especially for retirees. However, the future growth prospects for local companies are not in the realm of global peers. Will the earnings growth of Commonwealth Bank outpace Alphabet (the parent company of Google)? We’d argue no.

The reason Australian companies pay generous dividends is due to the lack of opportunities to deploy profits into new markets or segments.

Keep your Australian shares for dividends. Go global for growth.

Overcoming home bias

As humans, we tend to seek safety in what we are familiar with. You have first-hand experience visiting a Bunnings warehouse or Woolworths supermarket. Conversely, investing abroad means placing your money in companies and regions that could be perceived as foreign or risky. This behavioural bias is not unique to Australia, with investors across the globe overweighting to their local share market. 

In reality, international markets are dominated by companies we know and trust. Microsoft, Samsung, Tesla and L’Oréal are just a few of the businesses with meaningful weightings in the global share market.

InvestSMART Insight

One of the simplest ways to gain access to global shares is via ETFs. This provides access to the 98% of companies based outside of Australia without having the pick the winners yourself.

The InvestSMART International Equities Portfolio provides access to a low-cost portfolio of ETFs selected by our investment committee.

Although past performance is not an indication of future performance, in the last 12 months the portfolio has returned 21.12% and has paid a regular income of 2.03% per year, in addition to deploying hedging to mitigate currency movements where appropriate. Best of all, we provide an annual tax statement to consolidate your income and trading activity.

To learn more about whether this investment is suitable for you, consider reading the latest monthly report or visiting the dedicated International Equities Portfolio information page.